Negative equity: What it is and how to get out of it

Negative equity occurs when the market value of a house is less than the outstanding mortgage secured on it. But what are the problems of being in negative equity and how do you get out of it? We take a look

Angela Kerr Director, Editor

If you’re in negative equity, you’ll have problems getting a mortgage and moving house – but there are solutions to get out of it. So if you are in negative equity, we look at your options….

What is negative equity?

This means the market value of your property is less than the outstanding mortgage secured on it and it’s more common when house prices are falling. Negative equity is a major concern when you want to sell your home and also if you want to remortgage.

How do I know if I’m in negative equity?

Firstly, find out how much you owe on your mortgage by checking your mortgage statement or by contacting your lender. Then calculate how much your house is worth. You can do this by asking local estate agents, getting a valuation survey or by using our free instant home valuation tool. If the value of your property is less than what you owe on your mortgage then you are in negative equity.

Why is negative equity bad?

There are a number of problems that negative equity can cause.

• Difficulty remortgaging: Most lenders won’t let you switch onto a cheaper deal when your existing one ends if you’re in negative equity, so you’ll usually be rolled onto their standard variable rate which can be much more expensive.
• Problems selling: If you’re in negative equity you may find it difficult to move.

How to get out of negative equity on a house

So what are your options?

1. Stay put

If you can, stay in your home and slowly pay off your mortgage. Give it a few years and prices might rise and you may find yourself in positive equity. This will either be because property prices have risen, or because you have paid off enough of your mortgage. Negative equity only becomes a problem when you sell your home, or if you want to borrow against your home. So if you can, sit it out.

2. Reduce your mortgage debt

Do you have savings that you can use to pay off some of your mortgage? Most mortgages allow you to pay off up to 10% each year without penalty, and in some cases you can pay off more. But even smaller repayments can be helpful. But always check the terms of your mortgage as not all allow overpayments.

3. Let out your home and rent somewhere cheaper

You may consider letting out your house if you can rent somewhere else cheaper or move in with family. This means you could put the money you save into paying off your mortgage and trying to get out of negative equity. However, you’ll need to get permission from your mortgage lender in order to do this. For more information read our guide on becoming an accidental landlord.

4. Selling a house in negative equity

Selling a house with negative equity is possible but only if your mortgage lender agrees to it. You’ll need their agreement because selling a house with negative equity means you’ll be in breach of your mortgage terms. Your lender may agree to the sale, particularly if your home might otherwise be repossessed. However, there may be specific requirements, such as using an approved agent to sell the property and needing to provide the lender with evidence of the market value.

Selling a house with negative equity is rarely advised and is usually only a last resort. Not only will you lose the deposit you paid but you will also owe your lender money. If you do want to go ahead with the sale and your lender agrees you will need to make repayments on the shortfall. If you don’t make these payments as agreed you could be taken to court.

You will also need somewhere to live, and to pay all the costs of selling which can total in the tens of thousands.

By selling your house in negative equity you could end up in serious debt so you should seek professional advice. There are a number of places you can go for free, confidential, independent, unbiased and professional help including Citizens Advice and National Debtline.

5. Allow your home to be repossessed

You should avoid negative equity house repossession if at all possible. Public auctions of repossessed homes tend to attract lower prices than private sales, so you could end up owing your mortgage company more than if you had sold your home yourself.

Your credit rating will be bad for at least six years, making it more difficult to get a mortgage in future.

The mortgage lender will be able to pursue you for up to six years for any outstanding debts.

6. Declare bankruptcy

• The worst option is to declare bankruptcy, because after you do, it is very difficult to borrow money again for many years
• You also cannot act as a Director of a company, and face a number of other restrictions
• Your mortgage lender will still be able to take your home
• It may be worth considering if you fall into very serious negative equity, and do not believe you will be able to repay your debts for many years after you have sold your home
• Ensure you get good legal advice before declaring bankruptcy

Don’t delay seeking help

If you’re having problems keeping up with your mortgage repayments contact your lender as soon as possible. It may be able to offer options to make your payments more manageable. For more information read our guide Can’t pay mortgage – what now?

How likely is negative equity in 2023?

When house prices fall, negative equity is more likely; you can read the latest on house prices in our House Price Watch reports.

But remember, house prices vary considerably, even street to street, so don’t assume what’s happening to average house prices will affect your house in the same way.

If house prices are dropping in your area you will be at most risk of negative equity if:

• You bought the property recently so your only equity is the deposit you put down.
• You took out a 95% mortgage or 100% mortgage, which means you have little equity in the property.
• You overpaid for the property or bought it when house prices were at a peak
• The area where the house is located is in a long-term economic slowdown
• The property has suffered from problems which have reduced its value, such as subsidence.

Moving house if you’re in negative equity

If you’re hoping to move house with negative equity, how easy this is to do will depend on a number of factors including:

• How much negative equity you have

• The value of the property you’re hoping to buy
• Whether you are up-to-date with your current mortgage
• The size of deposit you can raise for the new property.

And don’t forget, moving house comes with costs which you’ll need to budget for.

What is a negative equity mortgage and can I get one?

Negative equity mortgages let you transfer the negative equity to a new home – so your debt moves with you. However, only a few specialist lenders offer negative equity mortgages, you’ll usually pay high interest rates and you may need to pay an early repayment charge on your existing mortgage if you remortgage before the end of your initial term.

To find out what your options are and what negative equity mortgages are available to you it’s a good idea to speak to a fee-free mortgage broker for negative equity advice.

Pros and cons of a negative equity remortgage

The main advantage of a negative equity remortgage is you can move house without having to pay off the negative equity on your mortgage, this may be especially useful if you can’t put off your move, such as if you need to relocate for work reasons. However, on the downside very few negative equity mortgage lenders, you might have to pay extra fees and charges and your new mortgage may have a higher rate than your current one.

How does negative equity happen?

When house prices rise, the amount of equity you have in your house increases. Conversely, when house prices fall, the amount of equity you have in your house reduces – and if the value of your house falls to lower than the size of your mortgage you will be in negative equity.

Negative equity on a house example

For example, say you bought a house for £200,000 with a £20,000 deposit and a mortgage of £180,000 and after two years you’ve paid off £10,000 leaving a mortgage balance of £170,000. If the house is now valued at £160,000 you would now be in negative equity to the tune of £10,000.

However, the chances increase the higher your LTV.

So using the above example, if you bought a £200,000 house with a £10,000 deposit and a mortgage of £190,000. If you’ve got the mortgage balance down to £180,000 after two years, the value would only need to drop to under £180,000 for you to be in housing negative equity.

Negative equity used to be more common for people taking out interest-only mortgages because with that type of mortgage, repayments only cover the interest, not the capital. So the outstanding balance of what you owe doesn’t reduce over the term. However, following the 2008 financial crash and with the tightening up of lending criteria, it’s now much harder to get interest-only mortgages. Lenders usually require a large deposit and an approved repayment vehicle in place.

How will negative equity affect my finances

If you want to move house or remortgage, it can take a serious toll on your finances. But if you continue paying your mortgage and can stay in your house it won’t necessarily affect your credit score or your everyday finances.

Will 100% mortgages make negative equity more likely?

As we explain, the higher your LTV the more likely you are to fall into negative equity if house prices fall, so a 100% mortgage puts you at an even higher risk.

In 2023, the 100% Track Record mortgage was launched by Skipton Building Society. However, this 100% mortgage is a 5 year fix, so assuming you can continue to make repayments over that time, in theory you will have started building equity in your home and you will hopefully see a rise in your property’s value too.

Speak to our award-winning fee-free mortgage partners at L&C to find out more about 100% mortgages

Guarantor mortgages and negative equity

Some guarantor mortgages are taken out at 100% LTV. A guarantor mortgage is when someone, usually a parent, takes on some of the risk of the mortgage by using their savings or property as security against the loan. Again, with no deposit this is a greater risk of slipping into negative equity, especially in the first few years of the mortgage. But if you take out a guarantor mortgage and you’re forced into selling in negative equity or your house is repossessed, your guarantor could lose their savings or home. Find out more in our guide Guarantor Mortgages Explained.

Help to Buy and negative equity

If you bought a house through the Help to Buy equity loan scheme, you might be worried about negative equity. The scheme, which is now closed, let you buy a new build home with a 5% deposit, you’d then borrow an equity loan from the government of up to 20% of the property’s value, or up to 40% if the property was in London. This equity loan was interest-free for the first five years and you would take out a mortgage for the rest.

However, getting a mortgage with a small deposit means you’re more exposed to the risk of negative equity if property prices fall. Also, buying a new build means it’s more likely too because the ‘new build premium’ means the value of your home may drop in the first years after buying it.

Ideally, when buying via the Help to Buy equity loan scheme you would repay the equity loan within the first five years or repay it at the end of the five years by remortgaging. But if you’re in negative equity, you will have difficulty selling a house with a Help to Buy equity loan or remortaging so it’s likely you’ll have to stay on your lender’s (often expensive) SVR. Plus, you’ll start paying interest on your equity loan too. Although, if the value of your Help to Buy house falls, the amount you’ll need to repay on your equity loan will reduce too.

If you want to buy a home and you have a small deposit, read our guide What will replace Help to Buy? to find out about your options.

Buy to Let and negative equity

Most Buy to Let mortgages are interest-only; as we explain above with this type of mortgage you only pay the interest on the loan each month and you don’t pay back any of the original amount you borrowed. As such these landlords rely on the property growing in value in order to build up equity in their rental properties. So if the property falls in value, the landlord may find themselves in negative equity. However Buy to Let mortgages usually require a bigger deposit than traditional mortgages – and having a larger amount of equity in a property makes falling into negative equity less likely. For more information read our guide Buy to Let mortgages explained.

How to avoid getting into negative equity on a house

There are some steps you can take when buying a house that will help protect you:

• Pay the right price: If you pay more for a house than it is worth then you will be at more risk of falling into negative equity. So do your research – find out more in our guide Making an offer on a house and negotiating effectively.
• Think twice before buying a new build: When you buy a brand new house you’ll pay a ‘new build premium’ and if you want to sell in the first couple of years after buying it you may not get your money back. For more information read our guide on Top tips for buying a new build home.
• Put down a bigger deposit: The larger your deposit, the more equity you will have in it. This means you’re less likely to fall into negative equity. Read our guide on How to save for a deposit.

Frequently asked questions